Is your child one of 800,000 teenagers due a windfall?
The first wave of Child Trust Funds (CTFs) and Junior ISAs start to come of age next week, potentially gifting teenagers a nice little windfall on their 18th birthdays.
Around 800,000 lucky teenagers will benefit from the £700m of CTF assets that will mature this tax year, while a further £7.5bn will mature over the next decade. Additional money will also start to mature from Junior ISA accounts.
What is a Child Trust Fund?
CTFs were launched in 2005 by then Chancellor Gordon Brown. They were meant to be a way to make sure every child had some savings and were made available for children born on or after 1 September 2002 – children who will celebrate their 18th birthday this month.
When they were first launched, the government contributed £250 per child or £500 for those from low income families. At age seven, a second sum of £250 or £500 was given. The initial sum reduced to £50 or £100 for lower income families in August 2010 and government contributions were stopped completely in 2011, when the CTF was replaced by the Junior ISA.
Transfers from CTFs to Junior ISAs became possible from April 2015 and many parents moved the money to benefit from a wider choice of providers and investments.
However, many CTFs still remain and those children born between 1 September 2002 and 2 January 2011 will have one, even if the parents are unaware of their existence. This is because if they didn’t open the CTF themselves, the government opened one for them.
If you think you may have a CTF but are not sure which provider it is with, you can get help finding it here.
What could the CTF windfall be worth?
Money for CTFs and Junior ISAs can be put either in cash accounts or stock and shares accounts.
Cash has always been popular because it is familiar and safe – while stocks and shares can go up and down in value, cash will only decline in real terms if the rate of inflation is higher than the interest rate paid. £100 today will buy you less in 10 years’ time if inflation has been 2% but the interest paid was only 1%, for example.
While stocks and shares are riskier, they have the potential to produce much better returns over the long-term. And this has been the case over the past 15 years since the CTF was introduced.
Despite experiencing two stock market crashes in the intervening years – the global financial crisis and the coronavirus pandemic – stocks and shares have performed better than cash.
Cash CTFs would have turned a £1,000 investment into about £1,715 today. Not all funds were available for CTFs, but as a proxy, the average UK equity fund would have turned the same initial investment into £2,310. And had a parent or guardian chose to invest overseas, the amount would have become £3,393 in the average global equity fund.
However, all of these areas lagged considerably behind the best performing sector: the average IA Technology and Telecoms fund produced a pot of money worth £7,291 – more than double those mentioned previously. Chinese equity funds were second (£6,072) and US smaller companies funds third (£5,111).
Top ten best performing funds since the CTF was introduced
The best performing fund over the period has been Baillie Gifford Global Discovery, which would have given a huge windfall of £12,162. It is followed by Candrian Equities Biotechnology in second place (£11,585) and Baillie Gifford American in third (£11,510).
What should a child do with their CTF windfall?
Taking the time to have a conversation now with your child about how to use the money could be a good idea – that way you have time to convince them blowing the lot on a holiday may not be the best outcome.
No doubt some will want to spend the money immediately, but others may like to use it towards their university education, or even invest it in an adult ISA so that it can continue to grow and be used for other life events in the future – like buying a house or getting married.
Either way, I’m sure the unexpected nest egg will make for some very happy returns in more ways than one.
Juliet Schooling Latter is research director at Chelsea Financial Services